Why The Medical Office Sector Isn’t Worried About $1T In Federal Budget Cuts

The One Big Beautiful Bill Act signed by President Donald Trump cuts more than $1T in Medicaid, a move that will kick an estimated 12 million people off of health care.

But for the medical office sector, what sounds like a looming tsunami of half-empty doctors’ waiting rooms is just another wave in the ever-changing sea of healthcare policy. 

Property owners are exercising some caution in underwriting while more closely scrutinizing tenants' credit, but landlords and industry investors are largely confident that the property vertical's historically strong position will hold.

“For a landlord, what matters is the ability of the tenant to pay rent, and is that ability hampered to a level where that rent coverage gets diminished and they cannot pay,” said Vikram Malhotra, a managing director focused on real estate equities at Mizuho Americas. “In our view, there's theoretically some impact to rent coverage because of less volume and less revenue, but we don't see the risk at a level where that hampers the ability to pay rent."

Demographic trends are feeding strong demand in the medical office sector, which has been steadily climbing since the waning days of the pandemic. The impact of federal spending cuts on medical occupiers is likely to be overcome by what are typically wide profit margins for medical tenants, Malhotra said.

Occupancy ticked up 15 basis points quarter-over-quarter to 92.6% at the end of June, according to data from analytics firm RevistaMed and provided by Avison Young. Rents continue to climb, and net absorption as a percentage of inventory hit 0.5% in the second quarter, a peak that the sector has hit three times in the last four years. 

Wesley Preuss, a principal at Avison Young in Virginia who represents medical tenants, said her clients closely watched as Congress held marathon debates to hammer out the legislative package that will define Trump’s second term. After the dust settled, they largely concluded that the massive spending cuts won’t squelch demand for their services.  

Landlords have always had an interest in their tenants’ patient mix and whether those customers were paying through a federal program, a private insurer or out of pocket. But the budget package is leading landlords to increase scrutiny on potential tenants.

“The demand from our perspective remains strong, and we haven't seen anyone fully pause decisions,” Preuss said. “But we've certainly seen clients take a harder look at capital just because of the uncertainty with this bill coming.”

Hospitals are likely to see the deepest impacts from the budget cuts, given that Medicaid accounted for roughly a fifth of all hospital care spending in 2023, according to health policy research firm KFF. Rural hospitals and medical systems in smaller states that have limited revenue sources are the most at risk of facing challenges balancing their books, Malhotra said. 

It’s less clear how much the dollars lost from budget cuts will impact outpatient service providers that see patients via referral. 

“There is some theoretical credit risk from certain tenants that will see a smaller volume or get impacted by states having less money altogether because of limitations of provider taxes,” Malhotra said. But the headwinds haven’t blunted optimism in the sector so much as caused landlords and investors to take a closer look at their tenants’ books.  

“I don't think the bill makes most tenants pause on their expansion. I think it just makes the landlord say, ‘Maybe I need to revisit my underwriting,’” he said.

The Republican budget’s steep cuts to federal healthcare spending were deeply contentious and threatened to sink Trump’s signature policy package as it made its way through Congress. 

North Carolina Republican Sen. Tom Tillis lambasted the bill only to be scolded by the president, who promised to back a primary challenger against the senator. Tillis announced shortly after that he would not seek reelection. 

In addition to the millions of Americans who are expected to lose coverage by 2034 because of the cuts to Medicaid, the nonpartisan Congressional Budget Office estimates that another 5 million Americans will lose their coverage by 2026 because of changes to the healthcare marketplace. 

Republicans argue that the bill, which introduces work requirements and stringent reporting standards, will help eliminate waste and fraud while pushing able-bodied people off of federal healthcare rolls.  

The funding won’t disappear overnight, with rolling cuts occurring over several years. Most of the $340B in combined cuts to hospital funding are delayed until 2028, and the healthcare industry lobbyists who won those delays are likely to fight in Congress to have that funding restored, Reuters reported. 

Across the sector, there’s hope that the steepest cuts will be pared back, Preuss said. 

“The implementation will take a while, and one of the things that I've heard is that maybe it doesn't get fully implemented,” she said.

Investors unwilling to bet that funding will be restored are instead putting extra scrutiny on the creditworthiness of tenants at the properties they’re looking to invest in. 

“When I'm looking at an opportunity, I start to question the investment based on a payer mix that heavily relies on Medicaid,” said Eliott LaBreche, founder of medical office investment and development firm Vitalis.

Location is a key facet of any property valuation, but area demographics are central to medical office pricing. Factors like high individual earnings, strong home values and an aging population more likely to use medical services have always helped draw development. 

Cutting funding for Medicaid is expected to have an outsized impact on rural healthcare systems, and the bill could exacerbate an already wide imbalance that is pushing investment into top urban markets. 

The policy package signed by Trump includes a $50B program to help rural hospitals transition away from a reliance on Medicaid payments and a now-eliminated piece of the tax code that allowed them to receive more federal funding through a circuitous billing process.

“Investors across the board — middle market people like me to really large institutions — are going to be more focused on primary markets with very strong demographics,” LaBreche said. “That could have a negative impact for assets and tertiary markets that rely heavily on Medicaid.”

LaBreche founded Vitalis in 2021, when a frothy market and low capital costs made acquisitions easy to find. But the pace of recent growth — his firm owns about $250M in outpatient medical buildings across 16 states — has become grinding as elevated interest rates and macroeconomic uncertainty have kept properties from coming to market. 

“Where we've been saved is activity on the doctor side, buying buildings from doctors and having sale leasebacks with them, that's been good,” LaBreche said. “Where it has not been as robust has been on buying from an investor. That volume has fallen off a cliff, because their assets have been devalued.”